Neither Black nor White: Another Perspective on the Chinese Economy

When it comes to analyzing China’s economy, nothing is simple. Start with the numbers. Some of them are wrong.

The most egregious example is the official unemployment rate, which has weathered multiple economic upheavals while barely breaking above 4%. The government’s house-price figures were pilloried by statisticians for understating the true rise in prices thanks to a series of methodological flaws, until the government finally stopped publishing national data.

Exports earlier this year appeared to be inflated by an epidemic of false invoicing aimed at bringing money into the country, in defiance of China’s capital controls. And many experts think the official economic growth rate, even if broadly right, is “smoothed” over time – its peaks and troughs are less dramatic than the underlying reality. This suits a government that likes nothing more than stability.

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Courtesy of Pearson Scott Foresman

Even the Premier, Li Keqiang, has expressed skepticism about the numbers. In 2007, according to a U.S. dispatch disclosed by Wikileaks, he told the then U.S. ambassador that China’s gross domestic product was “for reference only” – recommending alternative measures like electricity consumption, rail freight and loans as a better gauge of economic growth.

The inadequacy of China’s official data has spawned a booming market in private-sector research that seeks to improve on what the National Bureau of Statistics tells us. HSBC and Market News International both publish monthly Purchasing Managers’ Indexes that compete for investor attention with the government’s measure. Real estate agents Soufun and E-House China produce their own measures of house prices.

There’s also the China Beige Book, created by a private polling organization and modeled on the U.S. Federal Reserve’s regular survey of economic conditions across America. Launched in the first quarter of 2012, the China Beige Book is approaching its second birthday. It is published every quarter, not as often as the Fed’s, but in other ways the idea is the same: a survey of companies and bankers designed to pick up trends on the ground that the top-down macro statistics miss.

The preliminary results from the fourth quarter China Beige Book, released on Thursday, paint a very different picture from the official data. “The strong recovery so confidently declared by most analysts [earlier this year] is in fact a fiction,” said Leland Miller, president of China Beige Book International.

While official figures China’s gross domestic product growth slowing to 7.5% in the second quarter of the year, and then bouncing back to 7.8% in the third, the Beige Book registered few signs of such a rebound.

Most economists expect the final quarter to be weaker than the third. But the Beige Book suggests a modest improvement in the fourth quarter compared with the one before, although momentum is still significantly weaker than it was at the start of the year.

Inventories of unsold goods are up in almost all sectors, according to the Beige Book’s findings, whereas the official PMI has them falling. And while official data suggest China has little to fear from inflation, with the consumer price index rising a tepid 3% in the year to November and factory-gate prices actually falling, the Beige Book registers a rise in both selling and input prices.

The Beige Book’s authors have a counterintuitive interpretation to go with their contrarian data. A slowdown can be seen in a positive light, they say, if it represents the long-awaited rebalancing of China’s industrial dinosaur of an economy toward one that better serves consumers.

Sixty-one per cent of retail firms saw revenue rise in the last three months, the Beige Book says, up a point from the third quarter. In this case, the Book’s findings gel with official data, which show retail sales growing by 13.7% in the year to November.

There are also signs of a geographical rebalancing, with the less-developed inland provinces catching up with more developed coastal areas.

“We consider these results to be potentially bullish,” said Mr. Miller. “A slowing economy is consistent with the rebalancing and restructuring long-promised by the country’s leadership.”

Then there’s the survey’s findings on credit. While bankers said that lending growth was stable, companies themselves said they were cutting back their borrowing. Only 23% said they were borrowed in the quarter, the lowest figure in the history of the poll.

The disturbing conclusion: A higher share of lending is going to roll over old loans to a small group of favored borrowers, while new customers struggle to get credit. Only 14% of bankers polled said that 30% or more of their loans went to new customers, another record low.

Some of the Beige Book’s findings point in a different direction from official statistics, but with the economic picture as murky as Beijing’s sky on a bad day, anything that sheds a little more light is welcome.

About China Real Time Report

China Real Time Report is a vital resource for an expanding global community trying to keep up with a country changing minute by minute. The site offers quick insight and sharp analysis from the wide network of Dow Jones reporters across Greater China, including Dow Jones Newswires’ specialists and The Wall Street Journal’s award-winning team. It also draws on the insights of commentators close to the hot topic of the day in law, policy, economics and culture. Its editors can be reached at chinarealtime@wsj.com.